German car manufacturer Volkswagen has sent shockwaves across the automotive industry with revelations that it has been rigging diesel emissions tests in the US. At the time of writing, the story is still unfolding, with activities in other countries and multiple manufacturers coming under the spot-light.
Almost half a million drivers in the US have now learned that their environmentally-friendly VW "clean diesel" cars are in fact far worse for the environment than they thought. VW has admitted that it used a device during emissions tests on diesel cars to falsify the emission data and conceal that some of its cars emit up to 40 times the US legal limit of pollutants. VW subsidiaries, Audi and Skoda, have also now confirmed that millions of their cars were also fitted with illegal software designed to fool exhaust emission tests.
The revelation by VW's US CEO, Michael Horn, that VW dishonestly manipulated the pollution data has wiped over €25bn off the company's value. VW now faces potential fines of up to $18bn, criminal charges being brought against its officials, and claims by disgruntled customers and shareholders. VW has set aside €6.5bn to cover the costs.
So as this scandal unfolds what are the implications for D&O insurers?
There will be official investigations and possibly criminal prosecutions involving individual directors. Indeed German prosecutors have confirmed they have launched a criminal inquiry into the activities of former CEO of VW, Martin Winterkorn, following allegations of fraud relating to "the sale of cars with manipulated emissions data". The defence costs of such investigations will be significant and may in principle be covered by D&O insurers, pending any adverse finding against the directors.
Numerous civil actions have already been filed in the US against both VW and its directors on behalf of customers and shareholders. Again, the costs of defending claims against the directors will in principle be covered by D&O insurers. Whilst direct shareholder claims against directors are permitted in the US, following the Morrison - F cubed decision, and the application of that decision by the Courts, securities claims by US and foreign shareholders, who purchased their VW shares on the German stock market, are unlikely to be entertained by the US Courts. Holders of VW American Depository Receipts, which are traded over the counter in the US, may be able to sue in the US, but they are a small percentage of VW shareholders.
The US Environmental Protection Agency has stated that VW could face fines for breaches of the Clean Air Act. The maximum fine is $37,500 per vehicle and on the basis that VW has said that 11 million vehicles are affected, the fine could be as much as $18bn. It appears however that any such action would be focussed against the company, rather than its directors. In any event, fines and penalties such as these are usually excluded by the D&O policy wording.
Other claims are likely to come from misled customers unhappy with their polluting vehicles or VW's competitors in the US (assuming they were not also involved in emissions-rigging) on the basis that VW's actions were anti-competitive because they allowed VW to take a significant share of the "clean-diesel" car market. The other most likely potential claim against directors is by the company itself, once the scandal has unravelled and the extent of the damage to VW is revealed.
Insurers will want to be satisfied that any presentation of the risk for the D&O policies notified was fairly made given the suggestions that VW may have been aware of the issue for some time. Multiple policy periods may therefore be affected.
VW has publicly admitted that it was dishonest. Any detailed admissions that are made will need to be considered, since many D&O policies are likely to require as a condition precedent that no admissions of liability are made without insurers' consent.
In addition, insurers will also wish to consider the usual fraud and dishonest conduct exclusions in the D&O policy that may apply. Although such exclusions are usually triggered by a finding of dishonesty (as to which see our separate article in the newsletter "Dishonest Conduct Exclusion – When is it Triggered?") they can also be triggered by an admission of dishonesty. Again, Insurers will need to consider carefully the terms of any admissions made by VW.
Given there are fears within the automobile industry that this is an industry wide problem, insurers may also see notifications across the entire insurance and reinsurance programme by the industry in an attempt to protect themselves against future claims which may follow.